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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark one)
(X) Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the Quarterly Period Ended December 31, 2002
or
( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from to
Commission File Number 1-13041
WATERLINK, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware 34-1788678
(State or Other Jurisdiction (I.R.S. Employer Identification No.)
of Incorporation or Organization)
---------------------------------
835 North Cassady Avenue
Columbus, Ohio 43219
(Address of Principal Executive Offices)
(Zip Code)
---------------------------------
614-258-9501
(Registrant's Telephone Number, Including Area Code)
----------------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2) Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock, $.001 par value -19,665,149 shares outstanding as of January 31,
2003
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INDEX
WATERLINK, INC. AND SUBSIDIARIES
PAGE
----
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated balance sheets - September 30, 2002 and
December 31, 2002 3-4
Consolidated statements of operations - Three months
ended December 31, 2001 and 2002 5
Consolidated statements of cash flows - Three months
ended December 31, 2001 and 2002 6
Notes to consolidated financial statements 7-10
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 11-17
Item 4. Controls and Procedures 18
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 19
Certifications 20-21
2
PART I, ITEM I - FINANCIAL STATEMENTS
WATERLINK, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS-UNAUDITED
September 30, December 31,
2002 2002
------------- ------------
ASSETS (In thousands)
Current assets:
Cash and cash equivalents $ 2,530 $ 3,241
Trade accounts receivable, net 11,210 10,246
Inventories 10,528 9,488
Costs in excess of billings 1,783 805
Other current assets 1,130 921
Net assets of discontinued operations 640 390
------- -------
Total current assets 27,821 25,091
Property, plant and equipment, at cost:
Land, buildings and improvements 1,626 1,637
Machinery and equipment 6,538 6,869
Office equipment 717 782
------- -------
8,881 9,288
Less accumulated depreciation 3,723 3,984
------- -------
5,158 5,304
Other assets:
Goodwill 24,250 3,830
Other assets 85 235
Net assets of discontinued operations 2,170 2,170
------- -------
26,505 6,235
------- -------
Total assets $59,484 $36,630
======= =======
See notes to consolidated financial statements
3
PART I, ITEM I - FINANCIAL STATEMENTS
WATERLINK, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS-UNAUDITED (CONTINUED)
September 30, December 31,
2002 2002
------------- ------------
(In thousands,
LIABILITIES AND SHAREHOLDERS' EQUITY except share data)
Current liabilities:
Trade accounts payable $ 6,848 $ 5,103
Accrued expenses 5,988 5,597
Billings in excess of cost 232 659
Accrued income taxes 313 309
Current debt obligations 39,674 39,130
-------- ---------
Total current liabilities 53,055 50,798
Accrued pension costs 3,787 3,787
Shareholders' equity (deficit):
Preferred Stock, $.001 par value, 10,000,000 shares
authorized, none issued and outstanding -- --
Common Stock, voting, $.001 par value,
authorized - 40,000,000 shares,
issued and outstanding - 19,659,694 shares
at September 30, 2002 and December 31, 2002 20 20
Additional paid-in capital 92,174 92,174
Accumulated other comprehensive loss (6,314) (6,044)
Accumulated deficit (83,238) (104,105)
-------- ---------
Total shareholders' equity (deficit) 2,642 (17,955)
-------- ---------
Total liabilities and shareholders' equity $ 59,484 $ 36,630
======== =========
See notes to consolidated financial statements
4
PART I, ITEM I - FINANCIAL STATEMENTS
WATERLINK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS-UNAUDITED
Three Months Ended
December 31,
2001 2002
-------- --------
(In thousands,
except per share data)
Net sales $ 14,880 $ 14,295
Cost of sales 11,525 11,155
-------- --------
Gross profit 3,355 3,140
Selling, general and administrative expenses 2,595 2,542
Amortization 159 --
-------- --------
Operating income 601 598
Other expense:
Interest expense (959) (870)
Amortization of loan fees (259) (76)
Other items-net (19) 3
-------- --------
Loss before income taxes (636) (345)
Income taxes 3 22
-------- --------
Loss from continuing operations (639) (367)
Discontinued operations-loss from operations (99) --
-------- --------
Loss before cumulative effect of accounting change (738) (367)
Cumulative effect of accounting change -- (20,500)
-------- --------
Net loss $ (738) $(20,867)
======== ========
Per share data:
Basic and assuming dilution:
Continuing operations $ (0.03) $ (0.02)
Discontinued operations (0.01) --
Cumulative effect of accounting change -- (1.04)
-------- --------
$ (0.04) $ (1.06)
======== ========
Weighted average common shares outstanding-
Basic and assuming dilution 19,660 19,660
See notes to consolidated financial statements
5
PART I, ITEM I - FINANCIAL STATEMENTS
WATERLINK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS-UNAUDITED
Three Months Ended
December 31,
2001 2002
------- -------
(In thousands)
OPERATING ACTIVITIES
Loss from continuing operations $ (639) $ (367)
Adjustments to reconcile loss from continuing operations
to net cash (used) provided by operating activities:
Depreciation 175 213
Amortization 417 76
Changes in working capital:
Accounts receivable 1,490 1,043
Inventories (512) 1,095
Costs in excess of billings 233 989
Other assets (322) 225
Accounts payable (1,179) (1,804)
Accrued expenses (296) (555)
Billings in excess of cost (219) 426
Accrued income taxes (42) (6)
------- -------
Net cash (used) provided by operating activities (894) 1,335
INVESTING ACTIVITIES
Purchases of equipment (124) (309)
Proceeds from sale of divisions 66 250
------- -------
Net cash used in investing activities (58) (59)
FINANCING ACTIVITIES
Proceeds from debt obligations 422 635
Payments on debt obligations (167) (1,193)
------- -------
Net cash provided by (used in) financing activities 255 (558)
Effect of exchange rate changes on cash (20) 39
------- -------
Cash flows (used) provided by continuing operations (717) 757
Cash flows used by discontinued operations (338) (46)
------- -------
(Decrease) increase in cash and cash equivalents (1,055) 711
Cash and cash equivalents at beginning of period 1,646 2,530
------- -------
Cash and cash equivalents at end of period $ 591 $ 3,241
======= =======
See notes to consolidated financial statements
6
PART I, ITEM I - FINANCIAL STATEMENTS
WATERLINK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002
(INFORMATION AS OF DECEMBER 31, 2002 AND FOR THE THREE-MONTH PERIODS ENDED
DECEMBER 31, 2001 AND 2002 IS UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three-month period ended December 31,
2002 are not necessarily indicative of the results that may be expected for the
fiscal year ending September 30, 2003. For further information, refer to the
consolidated financial statements and footnotes thereto included in the
Company's Annual Report on Form 10-K for the fiscal year ended September 30,
2002.
2. DISCONTINUED OPERATIONS
In May 2002, the Company sold substantially all of the assets of its Pure
Water Division for approximately $15.6 million in cash, $12.9 million of which
was received at closing and $2.7 million of which has either been placed in
escrow or has been held back by the purchaser, subject to reduction for any
indemnification claims made on or before May 30, 2004. There will not be any
gain or loss recorded in connection with the sale of the Pure Water Division
until such time as all indemnification periods have expired and the amounts have
been released from escrow.
Accordingly, the results of operations for the Pure Water Division have
been presented within discontinued operations in the accompanying consolidated
financial statements for all periods presented. The Company allocates interest
expense to its discontinued operations based on the expected net proceeds from
the sale of its assets. Information regarding discontinued operations for the
three-month period ended December 31, 2001 is presented below (in thousands):
Net sales $ 3,529
Operating income 129
Allocated interest expense (228)
Income tax expense --
--------
Loss from operations $ (99)
========
7
The remaining escrows and holdbacks related to the sale of the Pure
Water Division have been classified either as current or long-term assets on the
consolidated balance sheets at September 30, 2002 and December 31, 2002 based on
the anticipated timing of their release.
3. CUMULATIVE EFFECT OF ACCOUNTING CHANGE
In June 2001 the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 142 (SFAS No. 142),
"Goodwill and Other Intangible Assets". This statement requires that goodwill
and intangible assets deemed to have an indefinite life not be amortized.
Instead of amortizing goodwill and intangible assets deemed to have an
indefinite life, the statement requires a test for impairment to be performed
annually, or immediately if conditions indicate that such impairment could
exist. The Company adopted the provisions of SFAS No. 142 effective October 1,
2002, and as a result, no longer records goodwill amortization, which was
$159,000 for the three months ended December 31, 2001.
During the three months ended December 31, 2002, the Company completed
the initial goodwill impairment review as required under SFAS No. 142 and
determined that an impairment condition did exist. Using a discounted cash flow
analysis prepared by management, supported by an independent assessment of what
a market comparable valuation might be, the Company determined it was necessary
to reduce the balance of goodwill at October 1, 2002 by $20,500,000. As of
December 31, 2002, the remaining balance of goodwill was approximately
$3,830,000.
Had we accounted for goodwill under SFAS No. 142 for all periods
presented, our results from continuing operations and related per share amounts
would have been as follows (in thousands, except per share data):
Three Months Ended
December 31,
2001 2002
----------------------
Reported loss from continuing operations $(639) $ (367)
Add back goodwill amortization 159 --
----------------------
Adjusted loss from continuing operations $(480) $ (367)
======================
Reported loss per share from continuing operations $(0.03) $ (0.02)
Add back goodwill amortization 0.01 --
----------------------
Adjusted loss per share from continuing operations $(0.02) $ (0.02)
======================
There was no income tax effect related to the elimination of goodwill
amortization, since goodwill amortization with regard to the reporting units is
non-deductible for income tax purposes based on the nature of the acquisition.
Per share amounts for basic and assuming dilution are identical, as all common
stock equivalents are anti-dilutive for both periods presented.
8
4. INVENTORIES
Inventories consisted of the following (in thousands):
September 30, December 31,
2002 2002
----------------------------
Raw materials and supplies $ 6,279 $6,071
Work in process 203 282
Finished goods 4,046 3,135
----------------------------
$10,528 $9,488
============================
5. CONTRACT BILLING STATUS
Information with respect to the billing status of contracts in process is as
follows (in thousands):
September 30, December 31,
2002 2002
---------------------------
Contract costs incurred to date $20,664 $ 9,897
Estimated profits 8,753 4,184
---------------------------
Contract revenue earned to date 29,417 14,081
Less billings to date 27,866 13,935
---------------------------
Costs and estimated earnings in excess
of billings, net $ 1,551 $ 146
===========================
The above amounts are included in the accompanying consolidated balance
sheets as follows (in thousands):
September 30, December 31,
2002 2002
---------------------------
Costs in excess of billings $ 1,783 $ 805
Billings in excess of cost (232) (659)
---------------------------
$ 1,551 $ 146
===========================
6. CAPITALIZATION
Debt obligations consisted of the following (in thousands):
September 30, December 31,
2002 2002
---------------------------
Senior credit facility with a group of banks $36,424 $35,231
Revolving facility in England with a bank -- 649
Subordinated notes to related parties 1,000 1,000
Convertible subordinated notes payable
to former shareholders of C'treat 2,250 2,250
---------------------------
$39,674 $39,130
===========================
9
The Company's senior credit facility is with Bank of America, NA, as
agent, and with five other participating banks. Effective October 1, 2002, the
Company entered into an amendment to its senior credit facility that extended
the maturity date of the facility from October 1, 2002 to October 1, 2003,
assuming the Company maintains a certain level of earnings before interest and
taxes and maintains certain balance sheet ratios through September 30, 2003. The
amendment also requires the Company to present to the senior lenders on or
before June 30, 2003 a plan to repay the senior debt obligations. Concurrent
with the amendment to the senior credit facility, the maturity dates of all
subordinated notes payable were extended until October 15, 2003.
In December 2002, Sutcliffe Speakman Limited, Waterlink's wholly-owned
operating subsidiary in England, entered into a credit facility with The Royal
Bank of Scotland, with availability based on a percentage of eligible accounts
receivable, with a maximum borrowing amount of 1,250,000 pounds sterling. In
connection with this facility, certain accounts receivable in England were
pledged as collateral. In connection with entering into this credit facility,
Waterlink remitted $1 million of the proceeds to our senior bank group as
required by the October 1, 2002 amendment to the senior credit facility.
The comprehensive loss for the three months ended December 31, 2001 and
2002 was $966,000 and $20,597,000, respectively. The only significant component
of comprehensive income or loss, other than net income or loss, is the effect of
foreign currency translation adjustments.
7. GOING CONCERN CONSIDERATIONS
The accompanying consolidated financial statements have been prepared
on a going concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. As indicated in
Note 6, all of Waterlink's outstanding debt obligations are classified as
current liabilities, causing a working capital deficiency of $25,707,000. This
raises substantial doubt about Waterlink's ability to continue as a going
concern for a reasonable period of time. The financial statements do not include
any adjustments relating to the recoverability and classification of assets or
the amounts and classification of liabilities that might be necessary should
Waterlink be unable to continue as a going concern. The Company's continuation
as a going concern is dependent on its ability to: generate sufficient cash
flows to operate its business; meet its debt covenant requirements; and develop
and execute a plan to repay the senior credit facility obligations on or prior
to the maturity date. At this time, Waterlink can give no level of assurance
that we will be successful in developing and executing a plan to repay the
senior credit facility on or prior to the maturity date. If we are unable to
successfully satisfy requisite conditions and to repay the senior credit
facility, then Waterlink would be in default at that time under the terms of the
credit agreement. If there is such an event of default the senior lenders could
declare that all borrowings under the senior credit facility are then
immediately due and payable. In such event, Waterlink would need to examine all
alternatives, including, without limitation, possible protection under the
bankruptcy laws.
10
PART I, ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Waterlink is an international provider of integrated water and air
purification solutions for both industrial and municipal customers. Waterlink
was incorporated in Delaware on December 7, 1994. The continuing operations of
Waterlink are comprised of the Specialty Products Division.
CRITICAL ACCOUNTING POLICIES
Revenue Recognition
Waterlink considers its accounting policy regarding revenue recognition
on long-term contracts to be a critical accounting policy. The majority of
revenue relates to carbon sales and services and is recognized when title passes
upon shipment. The systems and equipment produced by Waterlink are custom
designed and can take a number of months to produce. Revenues from systems and
equipment contracts are recognized using the percentage of completion method of
accounting in the proportion that costs incurred bear to total estimated costs
at completion. Waterlink believes that this method of accounting best measures
revenue earned as progress is made toward completion of the contract. Revisions
of estimated costs are recognized in the period in which they are determined.
Provisions are made currently for all known or anticipated losses. Variations
from estimated contract performance could result in a material adjustment to
operating results for any fiscal quarter or year. Claims for extra work or
changes in scope of work are included in revenues when collection is probable.
Retirement Plans
Waterlink sponsors two defined benefit pension plans that cover
substantially all of our employees. The accounting for pensions is determined by
standardized accounting and actuarial methods that include critical assumptions;
which include discount rates, expected return on plan assets and future
compensation increases. Waterlink considers these assumptions to be critical as
they can impact periodic pension expense as well as the minimum pension
liability. During the year ended September 30, 2002, Waterlink increased the
additional minimum pension liability by $2,219,000 and reduced equity by the
corresponding amount. At December 31, 2002, Waterlink's accrued pension
liabilities totaled $3,787,000.
BACKLOG
In the past Waterlink has experienced quarterly fluctuations in
operating results due to the contractual nature of its business and the
consequent timing of these orders. In addition, certain of the contracts will be
subject to the customer's ability to finance, or fund from government sources,
the actual costs of completing the project as well as the ability to receive any
necessary permits to commence the project. Therefore, Waterlink expects that its
future operating results could fluctuate, especially on a quarterly basis, due
to the timing of the awarding of such contracts, the ability to fund project
costs, and the recognition by Waterlink of revenues and profits. In addition,
Waterlink has historically operated with a moderate backlog. As of December 31,
2002, Waterlink's total backlog from continuing operations was approximately
$14.1 million, consisting of $12.7 million of firm commitments to purchase
carbon and related services and $1.4 million of written purchase orders for
systems and equipment. Quarterly sales
11
and operating results will be affected by the volume and timing of contracts
received and performed within the quarter, which are difficult to forecast. Any
significant deferral or cancellation of a contract could have a material adverse
effect on Waterlink's operating results in any particular period. Because of
these factors, Waterlink believes that period-to-period comparisons of its
operating results are not necessarily indicative of future performances.
RESULTS OF CONTINUING OPERATIONS
The following table sets forth, for the periods indicated, statements
of operations data as a percentage of net sales. In an effort to enhance
comparability between the two periods, goodwill amortization has been excluded
from the three month period ended December 31, 2001.
Three Months Ended
December 31,
2001 2002
----- -----
Net sales 100.0% 100.0%
Cost of sales 77.4 78.0
----- -----
Gross profit 22.6 22.0
Selling, general and administrative expenses 17.5 17.8
----- -----
Operating income 5.1 4.2
Other expense:
Interest expense (6.4) (6.1)
Amortization of financing costs (1.8) (0.5)
Other items - net (0.1) 0.0
----- -----
Loss before income taxes (3.2) (2.4)
Income taxes 0.0 0.2
----- -----
Loss from continuing operations (3.2) (2.6)
Discontinued operations (0.7) --
----- -----
Loss before cumulative effect of accounting change (3.9) (2.6)
Cumulative effect of an accounting change -- (143.4)
----- -----
Net loss (3.9)% (146.0)%
===== =====
12
Three Months Ended December 31, 2002 Compared to Three Months Ended December 31,
2001
Net Sales: Net sales for the three months ended December 31, 2002 were
$14,295,000, a decrease of $585,000, or 3.9%, from the $14,880,000 in net sales
reported in the comparable prior period. On a consolidated basis, sales of
carbons and related services increased by 4.5%, represented by a 43.7% increase
in England that was partially offset by a 6.2% decrease in the United States.
This overall growth in sales of carbon and related services was more than offset
by a 30.5% decrease in sales of capital equipment. Sales of capital equipment
were down in both the United States and England as compared to the prior year.
Sales of capital equipment continue to be impacted by the lack of spending in
the marketplace.
Gross Profit: Gross profit for the three months ended December 31, 2002 was
$3,140,000, a decrease of $215,000 from the comparable prior period, primarily
due to the decrease in net sales. In addition, gross margins decreased slightly
from 22.6% for the three months ended December 31, 2001 to 22.0% for the current
quarter. The decrease in the gross margin reflects product mix and the
classification of certain manufacturing costs as compared to the prior year
quarter.
Selling, General and Administrative Expenses: Selling, general and
administrative expenses for the three months ended December 31, 2002 were
$2,542,000, a decrease of $53,000 from the comparable prior period. This
decrease is the result of the consolidation of the corporate headquarters into
the Specialty Products Division that occurred effective November 1, 2001,
partially offset by other costs. Selling, general and administrative expenses as
a percentage of net sales were 17.8% for the three months ended December 31,
2002 as compared to 17.5% for the comparable prior period.
Interest Expense: Interest expense for the three months ended December 31, 2002
was $870,000, a decrease of $89,000 from the comparable prior period. This
decrease reflects both a decrease in interest rates and principal reductions
made over the last year.
Amortization of Financing Costs: Amortization of financing costs was $76,000 for
the three months ended December 31, 2002 and $259,000 for the three months ended
December 31, 2001. The amount in the prior year period reflects the amortization
of a bank amendment fee relating to an amendment that extended the maturity date
of our senior credit facility from October 1, 2001 to January 15, 2002.
Virtually this entire amendment fee was amortized during the three months ended
December 31, 2001.
13
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, Waterlink's primary sources of liquidity have been:
- borrowings available under credit facilities
- net proceeds from the sale of Waterlink's common and preferred
stock
- net proceeds from the sale of businesses in connection with the
strategic alternative process
- issuance of common stock and seller financing incurred in
connection with Waterlink's completed acquisitions
- cash flow from certain profitable operations
Historically, Waterlink's primary uses of capital have been:
- the funding of its acquisition program
- working capital requirements including the funding for growth at
certain operations
- the funding required for certain under-performing acquisitions
- the funding of interest on borrowings and the repayment of
borrowings
In May 2000 Waterlink announced that its board of directors had
instructed management to explore various strategic alternatives, including the
sale of all or part of Waterlink that could maximize our shareholders'
investment in Waterlink. To date, Waterlink has sold four of its five operating
divisions: the biological division in two separate transactions in September and
December 2000; the separations division in February 2001; the European water and
wastewater division in a series of transactions during the fourth quarter of our
fiscal year ended September 30, 2001, and the pure water division in May 2002.
At December 31, 2002, Waterlink has recorded $2,560,000 of net assets of
discontinued operations that represents amounts either placed in escrow or held
back by the purchaser of the pure water division. These assets are subject to
reduction for indemnification claims made on or before May 30, 2004.
In September 2001 the Board of Directors of Waterlink determined the
corporate office should be relocated to its Columbus, Ohio facility. This
consolidation resulted in personnel reductions and the disposition of certain
fixed assets. Accordingly, Waterlink recorded a special charge of $2,560,000 in
2001 relating to severance obligations to eight individuals and the write-off of
certain fixed assets. At December 31, 2002, approximately $1,366,000 remains
accrued for severance obligations relating to two of these individuals and is
currently being paid at a rate of approximately $24,000 per month.
Waterlink does not currently anticipate making significant capital
investments in plant and equipment because we believe our current businesses do
not require such investments as well as our current financial position.
For the three months ended December 31, 2002, net cash provided by
operating activities was $1,335,000 and purchases of equipment totaled $309,000.
During the three months ended December 31, 2002, Waterlink collected $250,000 of
proceeds related to the sale of the European water and wastewater division that
was previously held back. This entire amount was remitted to our senior lenders
as required by the domestic senior credit facility.
14
Credit Availability
As of December 31, 2002, Waterlink's credit facilities were comprised
of (1) a $35,231,000 domestic senior credit facility with Bank of America, NA,
as agent, which expires on October 1, 2003, (2) a 1,250,000 pounds sterling
revolving credit facility in England with The Royal Bank of Scotland, and (3) a
$200,000 credit facility for our operating subsidiary in England with Bank of
America to support duty bonds and other similar instruments. The credit
facilities will be utilized primarily to fund operating activities of Waterlink.
At December 31, 2002 there were no borrowings available under the domestic
senior credit facility in the United States and approximately $527,000 of
borrowings available in England with The Royal Bank of Scotland.
Effective October 1, 2002, Waterlink entered into an amendment to our
domestic senior credit facility that extended the maturity date of the facility
from October 1, 2002 to October 1, 2003, assuming Waterlink maintains a certain
level of earnings before interest and taxes and maintains certain balance sheet
ratios through September 30, 2003. The amendment also requires Waterlink to
present to the senior lenders on or before June 30, 2003 a plan to repay the
senior debt obligations. Without an amendment to our domestic senior credit
facility that would further extend the maturity date, an infusion of additional
capital, or the sale of significant assets, Waterlink will not be able to meet
its scheduled payment obligations under the domestic senior credit facility. At
this time, Waterlink can give no level of assurance that we will be successful
in developing and executing a plan to repay the domestic senior credit facility
on or prior to the maturity date. If we are unable to successfully satisfy
requisite conditions and to repay the domestic senior credit facility, then
Waterlink would be in default at that time under the terms of the credit
agreement. If there is such an event of default the senior lenders could declare
that all borrowings under the credit agreement are then immediately due and
payable. In such event, Waterlink would need to examine all alternatives,
including, without limitation, possible protection under the bankruptcy laws.
In December 2002, Sutcliffe Speakman Limited, Waterlink's wholly-owned
operating subsidiary in England, entered into a credit facility with The Royal
Bank of Scotland, with availability based on a percentage of eligible accounts
receivable, with a maximum borrowing amount of 1,250,000 pounds sterling. In
connection with this facility certain accounts receivable were pledged as
collateral. In connection with entering into this credit facility, Waterlink
remitted $1 million of the proceeds to our senior bank group as required by the
October 1, 2002 amendment to the domestic senior credit facility. The balance
outstanding on the facility with The Royal Bank of Scotland in England was
approximately $649,000 at December 31, 2002.
The credit facilities restrict or prohibit Waterlink from taking many
actions, including paying dividends and incurring or assuming other indebtedness
or liens. The banks that participate in the domestic senior credit facility also
must approve acquisitions and dispositions. Waterlink's obligations under the
domestic senior credit facility are secured by liens on substantially all of
Waterlink's domestic assets, including equipment, inventory, accounts receivable
and general intangibles and the pledge of most of the stock of Waterlink's
subsidiaries. In addition, Waterlink has guaranteed the payment by our operating
subsidiary in England of its obligations under the $200,000 facility with Bank
of America.
15
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In August 2001, FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" (SFAS No. 144), which addresses
financial accounting and reporting for the impairment or disposal of long-lived
assets and supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of", and the accounting and
reporting provisions of Accounting Principles Board ("APB") Opinion No. 30,
Reporting the Results of Operations for a disposal of a segment of a business.
SFAS No. 144 is effective for fiscal years beginning after December 15, 2001.
Waterlink adopted SFAS No. 144 as of October 1, 2002 and the adoption of SFAS
No. 144 did not have an impact on Waterlink's financial position or results from
operations.
In July 2002, FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 requires companies to
recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or disposal plan and
nullifies Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)." SFAS No. 146 is to be
applied prospectively to exit or disposal activities initiated after December
31, 2002 and, accordingly, Waterlink can only determine prospectively the
impact, if any, SFAS No. 146 would have on Waterlink's financial position and
results of operations.
In December 2002, FASB issued SFAS No. 148 "Accounting for Stock-Based
Compensation-Transition and Disclosure." SFAS No. 148 amends SFAS 123
"Accounting for Stock-Based Compensation" and APB Opinion No. 28, "Interim
Financial Reporting." Companies reporting stock-based compensation on the
intrinsic value method, as does Waterlink, will be required to include in
interim financial statements, as well as annual financial statements, certain
disclosures of stock-based compensation cost and pro forma net income and
earnings per share information as if the fair value method of accounting for
stock-based compensation had been applied to all periods. SFAS No. 148's
amendment of annual disclosure requirements is effective for Waterlink's fiscal
year ending September 30, 2003, while its impact on interim financial
information is effective for Waterlink's quarter ending March 31, 2003. SFAS No.
148 will have no impact on consolidated net income or net worth of the Company
upon implementation.
16
FORWARD LOOKING STATEMENTS
With the exception of historical information, the matters discussed in
this report may include forward-looking statements that involve risks and
uncertainties. While forward-looking statements are sometimes presented with
numerical specificity, they are based on a variety of assumptions made by
management regarding future circumstances over which Waterlink has little or no
control. A number of important factors, including those identified in this
section as well as factors discussed elsewhere herein, could cause Waterlink's
actual results to differ materially from those in forward-looking statements or
financial information. Actual results may differ from forward-looking results
for a number of reasons, including the following:
- the ability to negotiate with its senior lenders amended repayment
terms and with other debt holders, additional amended repayment
terms
- the ability to obtain additional credit availability to support
working capital requirements
- changes in world economic conditions, including
- instability of governments and legal systems in countries
in which Waterlink conducts business
- significant changes in currency valuations
- recessionary environments
- the effects of military conflicts
- changes in customer demand and timing of orders as they affect
sales and product mix, including
- the effect of strikes at a customer's facilities
- variations in backlog
- the impact of changes in industry business cycles
- changes in environmental laws
- competitive factors, including
- changes in market penetration
- introduction of new products by existing and new
competitors
- changes in operating costs, including
- changes in Waterlink's and its subcontractors'
manufacturing processes
- changes in costs associated with varying levels of
operations
- changes resulting from different levels of customers
demands
- effects of unplanned work stoppages
- changes in cost of labor and benefits
- the cost and availability of raw materials and energy
- the cost of capital, including interest rate increases
- unanticipated litigation, claims or assessments
Readers are referred to the "Forward-Looking Statements" and "Risk
Factors" sections, commencing on page 16, in Waterlink's 2002 Annual Report on
Form 10-K filed on December 10, 2002, which identifies important risk factors
that could cause actual results to differ from those contained in the
forward-looking statements herein.
17
ITEM 4. CONTROLS AND PROCEDURES
(A) Evaluation of disclosure controls and procedures.
Under the supervision and with the participation of our management, including
our Chief Executive Officer and Chief Financial Officer, we evaluated the
effectiveness of the design and operation of our disclosure controls and
procedures as of February 4, 2003, the evaluation date. Based upon the
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that, as of the evaluation date, our disclosure controls and procedures are
effective in timely alerting them to the material information relating to us
required to be included in our periodic SEC filings.
(b) Changes in internal controls.
There were no significant changes made in our internal controls during the
period covered by this report or, to our knowledge, in other factors that could
significantly affect these controls subsequent to the date of their evaluation.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
99.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
signed by William W. Vogelhuber.
99.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
signed by Donald A. Weidig.
(b) Reports on Form 8-K.
On December 12, 2002 Waterlink filed a Current Report on Form
8-K reporting under Item 4 the resignation of Ernst & Young
LLP as our independent auditors, and the appointment of Saltz
Shamis & Goldfarb, Inc. to serve as our independent auditors
for the fiscal year ending September 30, 2003. A letter from
Ernst & Young LLP to the Securities and Exchange Commission
stating that Ernst & Young LLP is in agreement with the
statement contained in the first paragraph of Item 4 of the
Current Report on Form 8-K, and including under Item 7(c) a
copy of such letter.
18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Waterlink, Inc.
(Registrant)
By: /s/ William W. Vogelhuber
-------------------------------------
William W. Vogelhuber
President and Chief Executive Officer
By: /s/ Donald A. Weidig
-------------------------------------
Donald A. Weidig
Chief Financial Officer
Dated: February 12, 2003
19
CERTIFICATIONS
I, William W. Vogelhuber, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Waterlink, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing of this quarterly report (the "Evaluation Date");
and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
February 12, 2003
By: /s/ WILLIAM W. VOGELHUBER
--------------------------------------
President and Chief Executive Officer
20
CERTIFICATIONS-(CONTINUED)
I, Donald A. Weidig, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Waterlink, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a. designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing of this quarterly report (the "Evaluation Date");
and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in internal
controls; and
b. any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
February 12, 2003
By: /s/ DONALD A. WEIDIG
-----------------------------------
Chief Financial Officer
21